Retirement Income Planning Using Annuities

Self-preservation is the first law of nature. As the last remnant of the 76 million baby boomers transitions into retirement, there is a new reality that must be addressed.

The new reality is, in fact, an old reality because there is nothing new under the sun. Before the creation of government social security and Medicare, company pensions via defined benefit plans, and banks, men and women were responsible for providing food, clothes, shelter, and medical care from the cradle to the grave. Shortly following World War II, the economy shifted from an industrial manufacturing-based economy to a consumer credit-based economy. We were once a creditor nation that supplied the world with our goods and services; we later became a debtor nation where we presently are trillions of dollars in debt.

The retirement of the 20th century was based on the three-legged stool concept where:

1. A stable Social Security/Medicare,

2. Company pensions, and

3. Bank savings rates between five and 10% were earned by bank account holders, which provided retirees with a comfortable retirement.

In addition, prior to 1970, there was no inflation because the dollar was backed by the gold standard. Today, in the 21st century, retirees will live under the broken four-legged table concept, which is:

1. A broken Social Security and Medicare system,

2. Company guaranteed pensions have been replaced with IRAs, 401(k)s, 403(b)s, and other defined contribution plans that are not guaranteed and depend on the money you have accumulated,

3. Bank savings accounts are now paying bank account holders less than 1% on savings accounts. When you factor in inflation and taxes, bank account holders are losing money, and

4. Today's retirees will have to work either full or part-time for the rest of their lives.

A retirement readiness survey conducted in 2022 states that 28% of retirees are confident their retirement assets will last the rest of their lives. The other 72% were not confident that their assets will last the rest of their lives. The same retirement readiness survey conducted in 2023 stated that only 18% of retirees were confident their assets would last the rest of their lives, which means the other 82% were not confident that their assets would last the rest of their lives. Therefore, there is a retirement income crisis in America. There is a solution to this dilemma, but there must be a change in how we think. Retirees now must face the reality that they must provide income for themselves and their families from the cradle to the grave. This writer believes that a fixed annuity is the answer to the problem.

What is an annuity? An annuity is a contract between a life insurance company and an annuity owner. The insurance company guarantees and promises to pay the depositor of a specified premium a certain rate of interest that can accumulate money tax-deferred for a future day and time with the ability to convert that lump sum of money into a guaranteed income for a specific period of time (10, 15, 20 years) or a lifetime at the annuity owner's request. There are four types of annuities. One is an immediate annuity, which will pay you a guaranteed monthly, quarterly, semi-annually, or annually starting either 30 days up to one year after starting the contract. A fixed rate tax-deferred annuity will pay a current interest rate of either 1, 3, 5, up to 10 years. These annuities have a guaranteed minimum interest rate they will never go under. The third type of annuity is an index annuity. They will pay interest based on an index such as the S&P index; your earnings will be linked to the earnings of that index. The index annuity also has a minimum guarantee. Lastly, there is a variable annuity. Your money is at risk of loss; it is similar to a mutual fund where your earnings are dependent on stock or bond market returns. Your principal is not guaranteed. This is a brief overview of annuities. In subsequent blogs, we will go into details on the advantages and disadvantages of annuities, their purpose, and functions. Until the next blog, have a good day.

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Byron Hakim and Associates is a retirement planning firm specializing in income planning using dividend paying whole life insurance and fixed rate annuities. Life insurance provides a tax free death benefit and tax free loans. The fixed rate annuities provides safety of principal, competitive interest rates, tax deferral, and guaranteed lifetime income options.

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